May 2023 - Monthly Economic Outlook

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Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.

Banking crisis

We are not in 2008. This is not Bear Stearns. But the state of the US banking sector remains a concern. More bank failures can be expected over the coming months and quarters. This does not necessarily mean the US economy will enter a recession. In the 1980s, the collapse of a series of US savings banks did not bring about this scenario. Nonetheless, the risk is far higher than only two or three months ago. Developments in the US banking sector will be the principal driver this year of financial markets, especially currencies, in our view.


High: 1.1130  Low: 1.0891 Change: +0.54%

The US Federal Reserve has announced a monetary policy pause after raising its key rate by 25 basis points. In contrast, the European Central Bank has confirmed that further rate hikes will be necessary to bring down inflation (probably in June). The interest-rate differential between the two sides of the Atlantic should logically boost the euro. But the single currency first needs to break free from the range around 1.10. We do not expect the dollar’s pronounced underperformance in the first quarter to continue in the short term, mainly because of concerns about the US banking sector.


High: 0.8933 Low: 0.8744 Change: 0.01%

What is striking about sterling is that its performance is completely disconnected from the UK’s economic fundamentals. With the cost of debt doubling to 12% of GDP in the space of just two years (higher than in any eurozone country), there is every reason to believe that the UK will soon face tough fiscal choices. In other words, austerity appears inevitable. Even so, this is unlikely to have any effect on the UK currency. We expect little activity in the short term on the EUR/GBP pair, with a continued fluctuation range of between 0.87 and 0.90, as has been the case since the start of the year. 


High: 1.2585 Low: 1.2353 Change: +0.61%

The US dollar performed poorly in the first quarter. We expect the second quarter to be just as negative. The combination of the US banking crisis and the monetary policy pause is set to remain a drag on the US dollar. This is good news for sterling, which is clearly on an upward trend against the USD. We think the GBP/USD pair could soon reach the threshold of around 1.27 if there are no changes on the economic and financial fronts. The Bank of England’s meeting next week is unlikely to be a game changer (the market expects a 25 basis-point rate hike).


High: 7.6860 Low: 7.4676 Change: +1.35%

The EUR/CNH is on an upward trajectory. This has been the case since the start of the year and, given the Chinese economy’s weaker-than-expected performance in this post-Covid period, it seems likely that Beijing will seek to weaken its currency to boost the strategic exports sector. Added to this, the central bank has asked the provinces to aid exporter companies through subsidies. The combination of a weak currency and subsidies ensures solid trade figures (exports were well above forecasts in March). We expect the EUR/CNH to return to the range of around 7.80 in the medium term.


High: 0.9912  Low: 0.9745 Change: -1.24%

There were no surprises on the EUR/CHF pair. It has been on a steep downward trend year-to-date, losing 1.33% since January. As long as it remains below parity, which is clearly the case today, there is no prospect of a trend reversal. The current trend mainly reflects a strong CHF. The foreign-exchange market expects the Swiss National Bank to continue its monetary tightening policy longer than the European Central Bank, despite comparatively weaker inflationary pressures in the Confederation. On the margins, risk aversion linked to the US banking crisis is also providing a little support for the Swiss franc.



High: 1.5112 Low: 1.4623  Change: +1.65%

Nothing new. The EUR/CAD is still firmly on an upward trend (+2.86% year-to-date). The Canadian dollar’s weakness is explained by both the monetary policy pause decided on by the Bank of Canada (one of the first large central banks to opt for this solution) and the plunging oil price. China’s reopening is not creating any tangible demand boom, as initially expected. Investors are trimming their oil price forecasts (an end-of-year target of 100 dollars appears out of reach), which is also weighing on the Canadian dollar.The Canadian dollar is an interesting currency at present. 


High: 1.6786 Low: 1.6165 Change: +1.04%

In April, the surprise came from the Reserve Bank of Australia (RBA). At the start of the year, the RBA was very hawkish, favouring rate hikes to contain inflation. Then it dropped its hawkish stance amid the need to preserve the job market. Analysts thought this was where things now stood, explaining why they were expecting a monetary policy pause. But the central bank took the market by surprise by raising its base rate by another 25 basis points. This temporarily boosted the Australian dollar, but the underlying trend remains favourable to the euro (EUR/AUD pair up 1.04% in one month). One thing is sure: the RBA is no longer reliable. Further monetary policy U-turns cannot be ruled out. This is precisely what the market detests, since it causes huge leaps in volatility.




High: 151.62 Low: 142.55 Change: +3.32%

On many currency pairs, there has been no notable shift in trends. This is also the case for the EUR/JPY. The upward trajectory is clearly intact and we struggle to see what could change this. During the past month, the EUR/JPY reached a ten-year high of 151.62. As long as the Bank of Japan decides to maintain an ultra-accommodative monetary policy, as will probably be the case for at least another year, if not a year-and-a-half until it completes its strategic review, the market is unlikely to take buy positions again on the Japanese yen. There is only one direction for the pair: upwards. An unexpected revival of risk aversion could obviously boost the yen, but this would in any case be temporary.


High: 380.22 Low: 369.85 Change: -0.92%

At its last monetary policy meeting, the Hungarian central bank adopted a slightly more dovish tone. But this will clearly not change things. The attractiveness of the HUF is intact, especially for carry trade strategies. Investors seeking yield engage in arbitrage and the interest rates available in Hungary are manifestly more attractive than in any other country in the region. This is a fundamental and lasting factor that is underpinning the HUF, in our view. In the short term, the EUR/HUF may stabilise at around 370, but we do not rule out a steeper drop (our previous target of 355 remains valid at present).


High: 346.9 Low: 336.93 Change: -1.96%

The Hungarian central bank’s slightly more dovish tone does not change anything on the forex front, in our view. The USD/HUF is likely to continue its swift depreciation (down around 9% year-to-date). Barring a global resurgence of risk aversion, investors are seeking yield, and Hungary can be an attractive market in this regard. Since the first quarter, we have seen significant capital outflows from the US that have been recycled in Europe (including in Hungary). As long as this phenomenon persists, there can be no sustained recovery by the US dollar against the forint.


Economic calendar


05/05 USD April employment figures
10/05 USD April consumer price index
11/05 GBP Central bank meeting
11/05 USD April producer price index
16/05 EUR ZEW index of economic confidence in Germany 
23/05 HUF Central bank meeting